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Abstract:

Purpose – The aim of the paper is to study the long-run under-performance of UK initial public offerings (IPOs) by relating it to the pre-IPO financial performance of the firm as well as the managerial decisions taken before the IPO.

Design/methodology/approach – The three-year share returns of UK IPOs is studied using various methodologies such as buy and hold returns, cumulative abnormal returns and Fama and French three-factor returns.

Findings – It was found that the percentage of equity issued and the degree of multinationality of a firm are the key predictors of its performance after the IPO. It is also found that small firms behave differently from large firms and suffer from worse long-run performance than large firms.

Research limitations/implications – There is a great need for future research to focus on ownership structure and long-run returns. Further, a focus on the level of debt and venture capital financing in the pre-IPO period may also uncover important relationships with the long-run performance of a firm.

Practical implications – The results obtained from this study provide important information for the prospective long term investors in new issues. While pre-IPO performance of a firm cannot predict the post-IPO performance with certainty, nevertheless the results of this study suggest that long-term investors should show caution while deciding on long term investment in IPO firms.

Originality/value – The paper explains the post-IPO underperformance of firms by relating it to the pre-IPO managerial decisions made in the firm. It also documents the role of multinationality in explaining long run underperformance.

Keywords:

Company performance, Decision making, Share values, Strategic management, United Kingdom

Article Type:

Research paper

Article URL:

http://www.emeraldinsight.com/10.1108/03074350710748759

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